Lenders shun the self-employed

Millions of self-employed workers, already facing the blight of Covid-19, are receiving harsher treatment from mortgage lenders compared to salaried employees.

Self-employed borrowers are being asked for bigger deposits, additional paperwork, with some lenders lowering the amounts they can borrow and subjecting them to longer waiting times with more frequent and rigorous questioning.

There are over five million self-employed workers in the UK, with the majority now facing tighter lending criteria and affordability rules which, according to HSBC, could remain in place well into 2022.

Self-employed workers face tighter lending criteria and affordability rules 

Andrew Montlake, of mortgage broker Coreco, said: ‘It is hard not to feel sorry for the legions of self-employed people out there who are finding their path to getting a mortgage blocked by tougher underwriting and additional questions even though they may have perfectly good businesses.

‘Many lenders are lumping everyone together, no matter what industry or their background.’

NatWest is one such lender, recently introducing a separate affordability calculation for self-employed workers which is less generous than the assessment for salaried employees.

Chris Sykes, mortgage consultant at Private Finance, believes NatWest’s decision to restrict the self-employed may be partly because their applications typically take more time for the bank’s underwriters to assess. 

‘NatWest adopted a blanket approach to reduce the number of self-employed applicants it has,’ said Sykes.

‘It has specifically put a section on its mortgage affordability calculator where you have to tick yes or no for if you are self-employed or not and NatWest will lend you less if you’re self-employed compared to an employed person.’

A NatWest spokesman said: ‘We look to understand an individual customer’s circumstances so we can lend responsibly and within that we apply different maximum limits to different customer groups based on their individual risk profile.’

Self-employed workers have to provide lenders with more paperwork and undergo additional questioning in order to secure a mortgage

Last month, Metro Bank also toughened up on self-employed workers requiring more documentation from them.

The bank previously requested three months’ worth of bank statements, but is now demanding six months of statements from self-employed people.

A Metro Bank spokesman said that for a salaried employee it would require just three months’ personal bank statements and payslips as opposed to three years’ tax returns, six months’ business bank statements and three months’ personal bank statements for self-employed workers.

William Rhind, of mortgage broker Habito, said: ‘It’s a tough situation for any self-employed people looking to get a new mortgage right now.

‘There are more hoops for the self-employed to jump through with lenders than ever before.’

Pandemic income is now more important

Rhind said lenders are no longer just interested in how a self-employed person has performed over the past two to three years but also how their income has fared during the pandemic.

‘Lenders are now typically reviewing turnover in the last three to six months to see if there has been a significant change since lockdown,’ he added.

‘Unfortunately, if someone’s taken financial support from the Government, or if their business completely closed during lockdown, lenders are seeming to judge these more harshly.’

Nationwide declared last month that the maximum mortgage it is willing to offer self-employed workers is 85 per cent of a property’s value while allowing salaried employees to continue to access to its 90 per cent mortgage products.

This means, for a self-employed worker wishing to buy a £200,000 property, they will need a minimum deposit of £30,000 to qualify for a Nationwide mortgage as opposed to £20,000 for a salaried employee.

A Nationwide spokesman said: ‘The impact of Covid-19 means that underwriting mortgages for self-employed borrowers is much more complex than before as a result of the difficulties in being able to fully assess long-term affordability in these uncertain times.

‘We are therefore temporarily aligning our maximum Loan to value for self-employed borrowers with other major lenders in the market.’

Self-employed borrowers seeking a mortgage 

Experts advise any self-employed workers looking to get a mortgage at the moment to ensure they have the most relevant and up-to-date documentation prepared in advance of any application.

‘They will need their latest accounting figures for the year ending April 2020, their last six months’ business bank statements and a statement as to why the Covid-19 crisis has not affected them unduly,’ said Andrew Montlake.

‘A projection into the next financial year may also come in handy. Some lenders are taking a dim view of businesses which have taken bounce back loans or grants, although others understand that this is perhaps prudent business management rather than a sign that a business is in trouble.

‘As ever, different lenders are taking different approaches and while at present I would probably suggest self-employed borrowers avoid lenders such as NatWest for example, there are other options.’

Obtaining advice from an independent mortgage adviser was deemed vital for those who work for themselves. 

‘If you are looking to get a mortgage and you’re self-employed – it can be done,’ said William Rhind.

‘But getting independent advice from a whole of market mortgage broker is more important than ever.

‘Brokers will be able to present all your lender options, the timeframes expected, and what you need to provide paper-work wise.’

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